Wednesday, August 21, 2013

Volatility In Emerging Markets - A Snapshot

Some say its a repeat of 1997. Let's look at the whys and hows.


a) its not 97, where the amount of foreign liquidity permeating into Asia was ginormous; hence when they exited, it was severe

b) in 97 the easy money debt was taken by listed companies, much of which went round and round to support ever higher prices; to that end, today the corporates are like church choir with their indebtedness

c) fears from Fed tapering was more pronounced last month, I believe the height of the foreign funds exit was last month, not now ... it looks more like a concerted effort by some hedge funds to target India and Indonesia; that being the case, if they wanted to exit, they have largely exited already, we are only seeing the remnants

 Markets routed the worst were Indonesia, Thailand and India .... this was not across the board. Yes, the exit by foreign funds from equities and bonds were severe, but there was differentiation. Hence it was not treating all emerging markets or all Asia Pac markets as one. This also showed that many international funds are now more savvy in segregating each market on their own merits.

 Australia and Malaysia were least affect in terms of equity markets but that does not mean we did correct elsewhere already - our ringgit has lost a lot of value, which in itself like the AUD have supported the export competitiveness. People look for our countries to hike their interest rates, but over the short to medium term, a significant currency weakness is tantamount to a hike in yields.

 This is a CURRENT ACCOUNT deficit issue. However, its not exactly how much of a deficit you are on, its the likelihood of reversing that deficit. Both Thailand and Malaysia are in the same category with India and Indonesia, but it is fair to say that the general assessment is that the deficit for both will persist and enlarge even over the next 12 months. The situation for Thailand and Malaysia is a bit different. Historically the deficit is an anomaly, a recent depreciation in their currencies should be able to reverse the course of the deficit, coupled with sound fiscal policies.

 Malaysia's ringgit has already depreciated substantively to compensate for a lot of the worries. Any further weakness in the ringgit will be overdone. Bank Negara has kept quiet, and rightly so. Bank Negara would be wise to allow the ringgit a weker range to arrest the fears.

 This is critical. Spike in bond yields translates to what it takes to attract foreign buyers of our bonds. The spike is to compensate for the eventual rise in yields for US Treasuries, hence the yield differentials needed to be maintained. If you take into account the rise in bond yields for Malaysia, coupled with the ringgit's weakness, it may be safe to say that future bond rollovers over the next 6 months will see foreign buyers owing to the weaker ringgit and higher yields. Thus eradicating the contagion fears somewhat.

 This is where the problem lies. This selling was probably done by very large hedge funds going short. They basically used the "Fed tapering" excuse to press down the currencies and equities of Indonesia and India primarily. It is easiest to concentrate on the weakest links. The amount of import covers basically also means you have the least amount of bullets to shore up your currency in an attack.

Lastly, its not a household debt thingee. Yes, they are high for certain countries but thats to be expected for a vibrant property sector in most countries. Look at Indonesia, its so obvious the funds were targeting them and India for other reasons. That does not mean that we do not have to address our household levels of indebtedness.